How to bring down the price of land

The real estate industry has been sluggish for several years in India, yet on an average land continues to be quite expensive (1). This has far reaching implications for housing for the less affluent, domestic and foreign investment, and economic development more generally. So, it is important to bring down the price of land. But how?

The first thing that comes to mind is that there is a need to amend the Land Acquisition Act, 2013, (hereafter, the Act) and other such laws. Though prices of rural land had risen significantly in many places for several years before 2013, it is this Act that has put a high floor on prices at which land can be acquired for real estate development or for industry. An attempt was made in 2015 to amend the law but it failed. But that need not be the end of the road, though it is imperative that poor farmers are taken care of substantively and definitely through ways other than distortion of land price. An amendment to the Act can make it cheaper for real estate developers to acquire and develop land. 

It is interesting that though an amendment to the Act is necessary, it is not sufficient. If the land price continues to be high in big cities, there is always a hope that land prices in rural India too will rise, if some variant of a “change in land use” comes through. This can keep prices in rural India high even if the Act is not in place. The story does not end here.

The top 10 (2) most populous cities in India occupy only about 0.2 per cent of the national land mass, but have 8 per cent of the country’s population and account for 15 per cent of GDP. So, the demand for land is high in these cities and naturally, then, the price of land is high. This situation gets aggravated by factors such as black money and easier availability of bank loans.  

But why have we had so little land in the top 10 cities even before the Act came into effect? Under “master plans”, broadly speaking, the government decides on the boundary of a city and it provides the “external” infrastructure ; the “internal” infrastructure is provided by the developers. The “external development charges” are eventually paid by property buyers. It is clear then that the basic role of the government is to enable real estate development. It is, however, unfortunate that despite some changes over time, this policy framework has been in a variety of ways restrictive for private developers. This is why even though substantial real estate development has happened over time, it has been inadequate. It is in this context that we have the endogenous outcome that only 0.2 per cent of the land with infrastructure is in the top 10 cities in India. What can we do? 

There is a need to significantly relax or liberalise the policy framework for real estate development so that more and more land can come under cities, wherever it is feasible. It is also imperative that public authorities sell some, if not all, of their excess land holdings(3) .

There is a rationale for providing a policy framework under which new cities can come up in what are currently rural areas. Chandigarh is a classic example. With an appropriate policy framework, it should be possible for authorities to enable the developers to move beyond what they have done in the past, though some companies have already built a somewhat new city—DLF with Gurgram in the 1980s, for example. The idea is to develop new cities with minimal financial burden and direct involvement of the government. There are lessons from the experience of the GIFT City, the 100 smart cities project, and Amaravati.

It may be argued that the expansion of existing cities and creation of new cities is hardly meaningful, given the huge inventory(4) of unsold homes at 6,55,710 units in India as of October 2019. However, this so-called excess supply is at prices that are high; this is indeed the basic proposition that we began with. At substantially lower prices, the demand can be very large. 

There are two corollaries that follow from all of the above analysis. First, the high price of land is hardly a case of irrational exuberance and a bubble. Second, the land prices are high not because the developers and investors have in some way jacked up the prices. Land prices are high due to the Act and due to the restrictive policy framework for real estate development.

A reduction in the price of land in India can have far reaching implications. It can reduce the need to incur the higher cost of construction in high-rise buildings. It can also reduce the need for schemes like Pradhan Mantri Awas Yojana. The reforms here in real estate, construction and allied activities may not parallel the abolition of the Licence Raj in the manufacturing sector in 1991 but they are important enough. 

I have provided here a simplified, sweeping and broad road map for reduction of land price in India over a period of time. Needless to say, the detailed research(5) suggests that we have a difficult journey ahead. This is also because there are issues of mindset and vested interests and corruption in this quest for lower price of land. 
The writer is visiting faculty, Indian Statistical Institute, Delhi 



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